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Hello everyone.
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So first part of the question says that calculate the real interest rate when the inflation rate is 3%, 4 % and 5%.
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So calculating real interest rate in the given three scenarios.
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First is when pi is equals to 3%.
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So r is equals to 1 .25 plus 0 .75 multiplied by 3%.
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That gives 1 .25.
00:44
Plus 2 .25 % that is r is equals to 3 .50%.
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Next scenario is when pi is equals to 4%.
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That is real interest rate is equals to 4%.
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So r is equals to 1 .25 plus 0 .75 multiplied by 4%.
01:23
So on solving this we get 1 .25 plus 3 % that is equals to 4 .25 % now coming to the third scenario when pi is equals to 5 % where r is equals to 1 .25 plus 0 .75 multiplied by 5 % so it will be 1 .25 plus 3 .75 percent.
02:11
So it will be r is equals to 5%.
02:17
Now coming to the next part of the question that says, draw the mp curve showing the points found above.
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Properly label the points from part a.
02:28
So here we'll take y and r on the other axis.
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Now here we'll take 1%.
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2%, 3%, 4 % and 5%.
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Then here we have 3 .5%, 4 .25%, and 5%...